News Trend: Putting Employment Numbers in Context for CRE

Employment figures in the U.S. are up one month, down the next. What does it mean for the real estate industry and how will CRE be affected? By Nicholas Ziegler.

At this point in 2011, if the current economic state had to be described in one word, that word would be “unsure.” It appeared as if things were beginning to stabilize during the summer. After a series of derailments, though, from stalling job numbers in August to the European debt crisis, the economic picture once again looked bleak. But then the September employment figures came back positive, and pundits, investors and regular Joes were looking at a slow recovery—once again. Up and down. Up and down. What’s it all mean for commercial real estate?

With the addition of 137,000 private-sector jobs last month—offset by the elimination of 34,000 government positions—resulting in a net gain of 103,000 jobs, as well as the revising of July and August jobs figures to reflect a gain of 184,000 positions, we’re beginning to look at a trend, albeit a small one. And those hirings certainly mean an increase in the amount of space needed in the office sector. According to Hessam Nadji, managing director of research and advisory services for Marcus & Millichap Real Estate Investment Services, approximately 250,000 full-time office positions have been added in 2011, contributing to a 20-basis-point decline in the national office vacancy rate to 17.4 percent in the third quarter.

That vacancy rate is tied directly back to employment. CBRE Group Inc., for example, uses a metric that pits job creation against office vacancies to draw conclusions about both, based on an average square footage per employee. An increase in employment can reasonably be assumed to result in a corresponding rise in office absorption, according to Asieh Mansour, CBRE’s head of research in the Americas.

“The economy’s operating under extremely lean circumstances,” she said. “One metric, corporate profitability per worker, is at an all-time high. Companies are getting the last drop of productivity out of workers, and to maintain that output they’ll need to hire.”

Mansour estimates that the country has, since the beginning of the recession, lost a total of 8 million jobs, with only 20 percent or so replaced. In order to maintain the current unemployment rate, the country needs to add 125,000 jobs per month. But strong, meaningful job growth will not occur until 2012.

Once that growth happens, there will be an immediate uptick in real estate. “You’re going to see jobs first in those areas that use space,” Mansour said. “Professional services and financial services are heavy users of office space.”

Once that recovery occurs, there should be a corresponding increase in property-level revenue as well. While net operating income for all types of commercial properties was down by 1 percent from year-end 2009 to year-end 2010, for instance, it still showed improvement from the previous year-over-year decline of 5 percent, according to Fitch Ratings. But “one year of greater NOI stability does not mean a recovery,” cautioned senior director Adam Fox.

Despite the uncertainty in the jobs picture, Fitch still has hope for the rest of the year, calling for CRE performance to slowly stabilize and then improve slightly by the end of 2011. But this slow crawl back to recovery could, as in recent months, be offset by some unseen force. As Fitch wrote in its most recent market report, “Recovery will continue to be influenced by factors such as unemployment and consumer spending.”